Broadgate: Market News 7/3

7 March 2013

Wall Street mostly edged higher on Wednesday, with the Dow hitting another record, helped by a private payroll survey that bodes well for the monthly jobs report due at the week’s end.

Improved labor market data from the private sector sparked the positive tone and boosted confidence for the U.S. government’s payroll report on Friday. The data from payrolls processor ADP followed similarly strong reads on housing and the services sector, reports that have contributed to lifting the Dow to historic levels and pushing up the S&P 500 to just 1.5 percent below its own record close.

Continued support from the Federal Reserve and equity valuations that are considered attractive compared with other asset classes have also pushed shares higher, and while some continue to call for a pullback at recent levels, those factors staying in place could keep the positive momentum intact.

“When you reach a record high, it triggers introspection about whether we’re overvalued, but I don’t expect a pullback because the reasons we’ve climbed are still in place,” said David Joy, chief market strategist at Ameriprise Financial in Boston. “The market has the opportunity to move higher until there’s evidence those factors will die out.”

The S&P 500 index is trading at 13.6 times estimated 12-month earnings, compared with around 14.9 times in October 2007 when the index hit its intraday high, according to Thomson Reuters data. This suggests that stocks are still about 9 percent cheaper than they were at the 2007 peak.

Relative to junk bonds, the earnings yield on the S&P 500 – the inverse of the P/E ratio and used for valuation comparisons with bonds – is around 7.5 percent – above the yield to maturity on junk bonds, which is around 6.5 percent, data showed, indicating that stocks have a better value than the riskiest corporate bonds.

The Dow Jones industrial average rose 42.47 points, or 0.30 percent, to 14,296.24, another record closing high. The Standard & Poor’s 500 Index edged up 1.67 points, or 0.11 percent, to 1,541.46. The Nasdaq Composite Index slipped 1.77 points, or 0.05 percent, to close at 3,222.36.

Shortly after Wednesday’s trading began, the Dow punched through the previous session’s intraday record, trading as high as 14,320.65.

On Tuesday, the Dow ended at 14,253.77, breaking through October 2007’s record close of 14,164.53.

For the year, the Dow is up 9.1 percent.

Tech shares weighed on the Nasdaq, with Microsoft Corp down 0.9 percent at $28.09 after the European Union fined the company $731 million for failing to offer users a choice of web browser.

Google Inc dipped 0.9 percent to $831.38 after hitting an all-time intraday high earlier in the session.

The positive catalyst for Wednesday’s advance came from signs of improvement on the jobs front. The slowly healing labor market has been one of the weaker spots of the recovery, but data on Wednesday showed private-sector hiring was surprisingly strong in February as companies added 198,000 employees.

It was an early look at the labor market two days ahead of the U.S. government’s closely watched non-farm payrolls report on Friday, which is expected to show the economy created 160,000 jobs last month while the unemployment rate held at 7.9 percent.

“If payrolls come in under 150,000, that could knock the market off stride, but if we got anything north of 175,000, that would give another boost to the market in the short term,” said Joy, who helps oversee $675 billion.

The larger S&P 1500 has already reached record highs, thanks to help from smaller-cap companies. The Russell 3000 Index, which measures the performance of the 3,000 largest U.S. companies, also hit a record intraday high earlier in the session.

The CBOE Volatility Index rose 0.4 percent, after previously gaining as much as 2 percent on the day as investors snapped up protection on concerns that the rally may run out of steam.

Staples shares tumbled 7.2 percent to $12.34 after the largest U.S. office supply chain reported lower-than-expected quarterly revenue and forecast weak earnings for the full year.

Roughly 6.3 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, below the daily average so far this year of about 6.48 billion shares.

About 53 percent of stocks traded on both the New York Stock Exchange and Nasdaq closed higher on Wednesday.

Currencies

The dollar hovered near its highest level in 6-1/2 months against a basket of major currencies on Thursday after solid job data fueled hopes that the U.S. economy is improving.

In contrast, the British pound fell to a 2-1/2-year low as market players positioned for more stimulus from the Bank of England as the UK economy faces the threat of triple-dip recession.

The yen and the euro were undermined by expectations the Bank of Japan and the European Central Bank could ease in the future, if not on Thursday.

“One reason the dollar is broadly strong could be that while the world’s many other central banks are eyeing more easing, at least at the Fed the debate is about exiting from stimulus, not doing more of it,” said Teppei Ino, currency analyst at the Bank of Tokyo-Mitsubishi UFJ.

The dollar index .DXY last stood at 82.533, having risen as high as 82.604, its highest since August 20, in late Wednesday trade. It has rallied more than 4 percent from this year’s trough of 78.918 plumbed on February 1.

Report showing U.S. private employers added a larger-than-expected 198,000 jobs in February bolstered hopes that Friday’s U.S. non-farm payrolls will surprise on the upside.

A strong reading could fuel speculation about when the Fed will end its bond buying program even though investors still think it will be months away to say the least.

The dollar index stood about just 0.1 percent below an important resistance around 82.72 from a declining trendline connecting its 2010 and 2012 highs.

A clear break would strengthen the case for the dollar’s further uptrend and open the way for a test of its 2012 peak of 84.10.

STERLING FIRST TO CRACK?

The firmer dollar saw sterling fall to $1.4965, easily surpassing the previous trough of $1.4985. It last stood at $1.4990, down 0.15 percent from late U.S. levels.

The euro held firmer at $1.2988, up 0.15 percent from late U.S. levels, with last week’s low of $1.2966 serving as a support for now. But it was still within sight of its December trough of $1.2876.

Against the yen, the greenback briefly popped above 94.00 for the first time since late last month, moving ever closer to a 33-month peak of 94.77 reached on Feb 25. It was last at 93.98 yen, down slightly from late U.S. levels.

Among the three central banks that hold policy reviews on Thursday — the BOJ, the ECB and the BoE — the BOE is seen most likely to add more stimulus to the economy, having faced a drip-feed of dismal economic data recently.

A growing number of economists reckon another 25 billion pounds of government bond buying is in the offing.

“Given that three MPC members voted in favor of Quantitative Easing last month, we believe the majority will opt for a moderate 25-billion-pound balance sheet expansion, which would put sterling under further pressure,” said Vassili Serebriakov, strategist at BNP Paribas.

The ECB, which meets in Frankfurt against a backdrop of political deadlock in Italy, is expected to hold fire for now, but perhaps open the way to looser policy in the future.

“While our base case remains for policy to be unchanged and little news from the press conference, the risks are skewed to the downside for the euro. (ECB President Mario) Draghi is likely to maintain a slightly more dovish tone compared with February,” analysts at Barclays Capital wrote in a client note.

Analysts expect no action from the BOJ until after a new governor is installed in coming weeks. Markets see fresh stimulus measures at one of its meetings in April.

Anticipation of aggressive easing from the BOJ has made the yen the worst performer among major currencies this year. The dollar has risen about 8 percent so far this year.

The greenback’s broad strength did not spare even commodity currencies, which tends to benefit from higher risk appetite.

The Aussie dollar stabilized for now at $1.0237, after having slipped from Wednesday’s 1-1/2-week high of of $1.0303.

Its Canadian counterpart flirted with eight-month lows on the U.S. unit after the Bank of Canada softened its stance on the need for tighter policy.

The U.S. dollar bought C$1.0317, having risen as high as C$1.0337 on Wednesday, near the eight-month peak of $1.0343 hit last week.

Source: Reuters.com

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